It is an approach to investment that explicitly acknowledges the relevance of environmental, social and governance (ESG) factors and long-term health and stability of the market.

It recognises that the generation of long-term sustainable returns is dependent on stable, well-functioning and well-governed social, environmental and economic systems.

The three pillars of ESG are integral to our investment process and is the most effective way of generating long-term, sustainable returns.

Real assets

Real assets are critical to a functioning economy and we have committed a considerable portion of capital to investments in student housing, infrastructure and renewable energy. The individual cash flow profiles of these assets have limited correlation to public markets and economic conditions, which is very important for our portfolios. The strategy has a long-term investment theme and aims to deliver inflation-plus returns over the full investment cycle.

One of the benefits of being part of the larger Momentum Metropolitan group with a large balance sheet is that we’ve got access to the capital necessary to make these investments, we can take a long-term view and, because of the reputation and the contacts we have, we can source a good pipeline of deals.

When it comes to the well-being of students, student living is of critical importance to us. Every year, many new students entering tertiary education struggle to find appropriate accommodation, with the shortage of accommodation approaching an estimated 300 000 beds annually. Eris Property Group, our property management division, researched the sector and expanded its services into this area, culminating in the RISE Student Living development, which is a fully furnished student accommodation around the corner from the University of Pretoria.

The African Infrastructure Investment Fund is invested in three assets, namely two toll roads and a renewable energy plant. All three investments are operational, mature projects in which we have an equity stake.

The Amandla Renewable Energy Fund has so far concluded one transaction, where the underlying project is a concentrated solar project outside of Upington.

Direct property

Another sizeable investment in our portfolios is the direct property fund, where there is deep social and multiplier effects in the communities around them. For example, job opportunities have been created, there has been infrastructure development, which brings relative benefits such as improved roads, access to medical care and transport cost savings as well as green building initiatives by way of water efficiency, metering and monitoring, solar energy and energy-efficient lighting.

Governance

In terms of governance, remuneration issues continue to dominate. A breakdown in the relationship between executive remuneration and performance measures has been the source of most of our votes against management remuneration. Another ongoing issue is the independence of directors. If directors are not independent enough, all stakeholders will be negatively affected. Many corporate failures have resulted from audit committee members not being sufficiently independent.

ESG risk

What is important to consider here is that E, S and G are not always aligned. A fine balance is required between adequate compensation and risk mitigation on the one side and its ESG risk factors on the other side, and this needs to be assessed on a case-by-case basis.

Accordingly, governance issues are becoming more important in the risk management process. One example is Eskom that has been plagued with poor corporate governance but remains of key strategic importance to government and the country, and we, as a socially responsible investor, have the responsibility to support this entity.

To mitigate and navigate some of these challenges, we have developed a state-owned entity lending framework, which in turn guides our risk management framework. The various entities are divided according to our risk criteria into respective categories of lending appetite. It’s informed by corporate governance issues, dependency on government, funding constraints and ESG issues on an entity’s credit rating.

UN sustainable development goals (SDGs)

To further address the barriers to sustainable development, as a corporate, we are committed to six of the 17 UN SDGs. With a particular focus on:

3 Ensure Healthy Lives and Promote Well-Being for All at All Ages

4 Ensure Inclusive And Equitable Quality Education and Promote Lifelong Learning Opportunities for All

7 Ensure Access to Affordable, Reliable, Sustainable and Modern Energy for All

8 Promote Sustained, Inclusive And Sustainable Economic Growth, Full and Productive Employment and Decent Work for All

9 Build Resilient Infrastructure, Promote Inclusive and Sustainable Industrialization and Foster Innovation

13 Take Urgent Action to Combat Climate Change and its Impacts

While we believe all the SDGs underpin all we do, if we collectively work towards the goals in focus, the impact would be more significant.

A ‘Just Transition’

Linked strongly to this, as the world economy moves to a carbon-free economy, the issue of employees and communities who are dependent on a carbon economy looms large. As most emerging market economies, like our own, are not rich or consist of masses of well-educated populations who can more easily switch to new industries, this transition has to be done in a very gradual and societal sensitive way, to not destroy lives and societies.

Our commitment to support a Just Transition on Climate Change was signed into effect on 30 March 2020, complementing our recently published climate change investment policy.

Here, we give recognition that the social dimension of the transition to a resilient and low-carbon economy is extremely important in our country. As investors, we can make an important contribution as stewards of assets, allocators of capital and as influential voices in public policy to make sure the transition produces inclusive and sustainable development.

Conclusion

Responsible investing represents a journey where we have to prioritise generating long-term sustainable growth in our portfolios, while doing good wherever we can. Often the rubber hits the road as we make day-to-day portfolio management decisions and responsible investing is going to remain a key area of focus for us.

ENDS